Improving the Performance of Standard Dispersion Strategies | Volos x OptionMetrics
Dispersion trading is a sophisticated options strategy that has gained wider popularity within the past few years. The strategy, which involves selling index options while buying options on individual constituent stocks, aims to capitalize on the relative overpricing of index premiums.
Dispersion strategies perform well in low-correlation environments, i.e. when stocks move in different directions. However, what alternatives do traders have when the market is no longer providing the conditions for a standard dispersion strategy to achieve profitability?
In a new collaborative research paper, Volos and OptionMetrics explore methods of improving performance and minimizing risk for dispersion strategies. The research details the historical performance of both standard dispersion strategies and a new active dispersion strategy that activates and deactivates positions based on the ratio between implied correlation (IC) and realized correlation (RC).
As seen above, the Active Dispersion strategy demonstrates superior risk-adjusted performance compared to “vanilla” approaches.
This research was produced using the Volos Strategy Engine, a systematic options strategy development platform. The Strategy Engine is a no-code platform that allows systematic options-focused professionals to design any options-based or traditional systematic strategy.
